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| Wall Street Bull: What could go wrong? |
After a ten year bull run of the financial markets, the Oregon Pension system is still badly underfunded.
Yikes.
Optimism got us into this mess. The current task in front of the Oregon legislature and the two additional state bodies that administer the Oregon Public Employees Retirement System is to deal with the fact that governments in the past funded public services partly by buying services on credit.
It was easy and pleasant to do.
It fit the agenda of both Democrats and Republicans. Government spending is a bi-partisan deal, although most pubic employee unions are aligned with Democrats. Still, Republicans liked their police and mandatory prison sentences, and Democrats liked their teachers and safety net programs for the poor. Both parties liked infrastructure projects, Republicans preferring roads for cars and trucks, Democrats wanting light rails and bike lanes. On balance, Democrats liked spending more.
Opposing taxes was bi-partisan, too, but Democrats would talk about service needs and problems to address. Republicans talked about government waste and about thrift, and on balance, Republican hated taxes more.
There is guilt on both sides.
The easy solution was to vote a level of service, some of which was paid for now as wages and current benefits, and some of which were to be paid later, as a retirement benefit. The employees agreed to that, too. Win-win-win. That is the "buying services on credit" part of the deal.
Decision makers told themselves they weren't actually stealing from their children. They had data to prove investment returns would pay the bill. The bull market of the 1980s and 1990s assured lawmakers that the magic beans of Wall Street investments would grow the pool of money in the retirement system so quickly and reliably that the future employees would be paid out of investments, not taxes.
Three quarters of the payment for PERS retirees is supposed to be paid out of investment earnings. Painless.
Except it didn't work. And that is true even now, after a ten year bull market run, with everything up
Bear markets happen. Things average out. In the good years one is supposed to save for the bad years, but that didn't happen and still isn't.
There are warning clouds that current economic expansion is faltering. If not now, or soon, sometime.
Click: Oregon PERS asset allocation
Oregon's five person PERS Board is deciding what investment return to assume for the investment pool going forward. The current level is 7.2% per year.
There are two problems with that. One is that all of the money cannot be invested "at risk" and some needs to be invested to provide reliable income returns and principal preservation, which means that some is subject to the current low interest rate environment, and that fits into the mix. Currently about 20% is in fixed income. That puts more pressure on the risk portion to perform.
The bigger problem is that they must estimate future returns from this point in the cycle. Indeed, this is a particularly treacherous time to measure investment returns. A ten year track record seems intuitively like a long time, sufficient to even out the ups and downs. Ten years ago was June, 2009, and we had just hit a major market bottom in March, 2009, so measured from there one is measuring from near the bottom of a valley to what may be the top of a mountain.
Investment returns going forward are unlikely to be 7.2% per year from here, in my opinion. No one knows. It is a guess, based on the reality of markets in the 35 years I have been looking at them.
Stuff happens. Things even out. In 2000 to 2002 the stock market lost half its value. It did it again in 2007-2009.
But aren't really smart, conscientious people saying 7.2% is reasonable? Yes. But they are operating under a constraint I am not. They have to shudder when facing reality, and I do not. The implication of lower investment returns is politically too awful to contemplate if it is ones actual job.
What do we need to do? We need taxpayers to pay in more money. Now. And next year and the year after. We have underfunded PERS, and are continuing to do so, even now, in the good times, when there was extra "kicker" money available to sock away.
Failure to do this now will only make things worse. The money not invested is money that doesn't compound. But this is a democracy and people vote. It is more fun to have money now to spend and pay bills later.
It is better to hope. Let the good times roll.
Useful links:
An Oregonian news story: Click: Oregonlive
Commentary by a citizen who shares my view, referenced in the article above: Click: David Berg
An explanation of "assumed rate": Click: Oregon.gov
It is hard to have a bull market, from this start point: https://www.crestmontresearch.com PE ratios and https://www.crestmontresearch.com update
It fit the agenda of both Democrats and Republicans. Government spending is a bi-partisan deal, although most pubic employee unions are aligned with Democrats. Still, Republicans liked their police and mandatory prison sentences, and Democrats liked their teachers and safety net programs for the poor. Both parties liked infrastructure projects, Republicans preferring roads for cars and trucks, Democrats wanting light rails and bike lanes. On balance, Democrats liked spending more.
There is guilt on both sides.
Three quarters of the payment for PERS retirees is supposed to be paid out of investment earnings. Painless.
Except it didn't work. And that is true even now, after a ten year bull market run, with everything up
There are warning clouds that current economic expansion is faltering. If not now, or soon, sometime.
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| Click: Oregon PERS asset allocation |
Investment returns going forward are unlikely to be 7.2% per year from here, in my opinion. No one knows. It is a guess, based on the reality of markets in the 35 years I have been looking at them. Stuff happens. Things even out. In 2000 to 2002 the stock market lost half its value. It did it again in 2007-2009.
But aren't really smart, conscientious people saying 7.2% is reasonable? Yes. But they are operating under a constraint I am not. They have to shudder when facing reality, and I do not. The implication of lower investment returns is politically too awful to contemplate if it is ones actual job.
What do we need to do? We need taxpayers to pay in more money. Now. And next year and the year after. We have underfunded PERS, and are continuing to do so, even now, in the good times, when there was extra "kicker" money available to sock away.
Useful links:
An Oregonian news story: Click: Oregonlive
Commentary by a citizen who shares my view, referenced in the article above: Click: David Berg
An explanation of "assumed rate": Click: Oregon.gov
It is hard to have a bull market, from this start point: https://www.crestmontresearch.com PE ratios and https://www.crestmontresearch.com update
5 comments:
Pension plans, including Social Security, depend on two factors: 1. Contributions from current workers, and, 2. reasonable expectations from recipients. Seems to me #2 in the PERS calculations is out of whack.
Seems to me that recipients have some responsibility in this as well. They accepted jobs and worked with the promise of a nice, if not cushy, retirement benefit, which was a fantasy. Now they cry foul.
If it's true that public service jobs need a con to get competent workers perhaps this is the real issue.
Probably should tie investment performance returns to US Treasury bonds and notes.
We vilify large public corporations for their executive pay, and consumer gouging, but count on stock market investments to fund pensions.
As for that guaranteed rate of return, past mistakes credited members with the entire amount, rather than the guaranteed amount. Worse, in a few cases, mistakes were made and too much was paid out to some retirees. There wasn't any clawback to correct those mistakes.
Peter is right. The hole has been dug, and the easy solution is to raise taxes to correct those mistakes.
The challenge is that this will affect most taxpayers who are unable to rearrange their financial affairs. The people most able to pay increased taxes will figure out a way to "leave" Oregon for tax purposes, but perhaps visit when necessary.
Others may park their assets in accounts where they are protected from taxes. We don't tax wealth yet, we only tax income.
Some of that wealth might be parked in accounts with tax-free investments that pay enough of a return each year to take care of retirement needs.
Seniors with Social Security income, might be free of state income taxes currently, but perhaps Oregon might join other states that tax those benefits.
Other states have exempted certain levels of income for seniors as an inducement to retire there. For example, Georgia exempts $65,000 per senior from their state income tax.
Even our current PERS retirees could lose some of their benefits. If I understand correctly, PERS retirees who live in Oregon have an uplift to their pension payments to offset Oregon state income taxes. If they move out of state, they lose that extra money.
Then there's that "we need to tax businesses so they pay their fair share" mantra, but no one is able to produce a formula defing "fair share". The usual targets are companies like Nike, Intel, Boeing, and Cascade Metallurgical. These multinational companies have billions in worldwide revenue and profits, yet have few sales within Oregon. Their benefit to Oregon is providing a very large number of jobs paying above average salaries and wages, resulting in above average income and property tax revenues. Our single factor sales factor is one reason they've expanded here. Mess with that, and they will look elsewhere long term
One thing missing from all this is whether or not Oregon is effective with it's spending. Are we getting our money's worth?
Teachers are on the warpath, asking for more pay and benefits. Their pay is all over the map in Oregon, yet we have a common school funding formula to make sure all students and schools have the same level of investment. We have bonding to take care of new schools.
Our funding is near the middle when compared to other states, yet results show us near or at the bottom in education outcomes. How do other states do more with less? Are our standards too high, or are our education methods wrong?
There are other factors consuming our tax revenues, but I think that sometimes our priorities are wrong or misguided, regardless of the good intentions. Where are we wasting our limited resources? Why pursue new revenue without a good understanding of what we could do better?
There’s another political issue. The rest of the job market has moved away from defined benefit plans to defined contribution plans, or more likely for most working people - no contribution plans. It’s hard to convince someone in the new gig economy making $12.00 - $15.00 an hour with no benefits or health insurance to pay more taxes for public employee pensions as they see Oregon continue to rank in the bottom of education funding. Yes taxes need to be raised to meet the contractual responsibilities of PERS, but raised on whom?
In our ten years of living here after retiring from Connecticut and New York, my wife and I have been amazed by the focus on "PERS." Back East there was never this kind of talk, verging on scapegoating IMHO. Then again, our monies were (evidently) more wisely invested. Our retirement earnings (they ARE deferred EARNINGS) get hit pretty hard by Oregon's income tax.
Andy Seles
Read the Oregonian story Peter linked above. No one in the state knows more about PERS than its reporter, Ted Sickinger.
Note the states that the last PERS Board Chairman (before current governor replaced him with a friend, with no experience) compares Oregon to.
PERS is not overstated; it is under appreciated.
I disagree with Peter that all this needs is higher taxes on the private sector. So does longtime Democratic Party & union consultant Tim Nesbitt.
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